Note: Since issuing the new revenue standard in May 2014, the FASB and IASB have proposed various amendments to
the guidance. This In depth supplement has not been updated to reflect all of the proposed changes. See In transition
US2015-08, The new revenue standard — changes on the horizon, for a summary of the changes, their impact, and the
areas where the FASB and IASB have taken different approaches.
No. US2014-01 (supplement)
June 11, 2014
What’s inside:
Overview .......................... 1
Identifying the contract
with the customer ......... 2
Determining transfer
of control and
recognizing revenue .....4
Variable consideration ... 7
Contract costs ................ 10
Collectibility ................... 12
Principal versus agent .. 13
Warranties .................... 14
Revenue from contracts with customers
The standard is final – A comprehensive look at
the new revenue model
Industrial products and manufacturing
industry supplement
At a glance
On May 28, the FASB and IASB issued their long-awaited converged standard on
revenue recognition. Almost all entities will be affected to some extent by the
significant increase in required disclosures. But the changes extend beyond disclosures,
and the effect on entities will vary depending on industry and current accounting
practices.
In depth US2014-01 is a comprehensive analysis of the new standard. This supplement
highlights some of the areas that could create the most significant challenges for
entities in the Industrial Products sector as they transition to the new standard. These
areas include, but are not limited to, contract combinations and contract modifications,
transfer of control, and contract costs. Other supplements present the impact of the
new standard in other industrial sectors, including Aerospace and Defense, and
Engineering and Construction.
Overview
The FASB and IASB developed a single, comprehensive revenue recognition model for all
contracts with customers to achieve greater consistency in the recognition and
presentation of revenue. The model in the new standard is based on changes in contract
assets (rights to receive consideration) and liabilities (obligations to provide a good or
perform a service). Revenue is recognized based on the satisfaction of performance
obligations, which occurs when control of a good or service transfers to a customer.
The Industrial Products (IP) sector comprises a range of entities involved in the
production of goods and delivery of services across a diverse industry base. This includes
industrial manufacturing, metals, chemicals, and forest, paper and packaging entities.
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Although each industry in the IP sector has different product and service offerings, there are a number of common
revenue recognition issues. Management of IP entities should carefully assess the new standard to determine the extent
of its impact on their businesses.
Identifying the contract with the customer
An IP entity may enter into multiple contracts with the same customer at the same time. These contracts may include
products that will not be provided directly by the IP entity entering into the contract. The contracts could also be
affected by subsequent modifications (such as change orders).
New model
Current U.S. GAAP
Current IFRS
Combining contracts is permitted
provided certain criteria are met.
Combining is not required as long as
the underlying economics of the
transaction are fairly reflected.
Combining contracts is required when
certain criteria are met.
Contract combinations
Contracts entered into at or near the
same time with the same customer
need to be combined if one or more of
the following criteria are met:



The contracts are negotiated as a
package with a single commercial
objective.
Cash paid to a customer is recorded as
a reduction of revenue unless the cash
is for the purchase of an identifiable
The amount of consideration to be good or service from the customer that
is separate from the goods or services
paid in one contract depends on
being provided by the entity.
the price or performance of the
other contract.
The goods or services promised in
the separate contracts are a single
performance obligation.
Promises to provide goods or services
to the customer’s customer can be
performance obligations if they are
identified in the contract.
Promises to pay cash to the customer,
unless paid for a distinct good or
service, are accounted for as
reductions of the transaction price.
Cash paid to a customer is recorded as
a reduction of revenue unless the cash
is for the purchase of an identifiable
good or service from the customer that
is separate from the goods or services
being provided by the entity.
Impact – both U.S. GAAP and IFRS:
Current guidance under both U.S. GAAP and IFRS requires that the contract be
the unit of account, except when the criteria for combining contracts are met.
The new standard provides criteria for combining contracts that are similar to
existing guidance. Both frameworks also currently provide guidance on
identifying and separately accounting for deliverables in an arrangement. The
new guidance provides more detailed criteria that could result in the
identification of more deliverables (performance obligations) than in the past.
Entities that sell goods to a distributor, but promise additional goods or
services directly to an end customer will need to allocate some of the
transaction price in the contract to those goods and or services, even if they will
be provided by a third party. Revenue is recognized when those goods or
services are delivered.
The accounting for cash paid to a customer is similar to today’s requirements.
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New model
Current U.S. GAAP
Current IFRS
A change order is included in contract
revenue when it is probable that the
customer will approve the change
order and the amount of revenue can
be reliably measured.
A change order (known as a variation)
is included in contract revenue when it
is probable that the customer will
approve the change order and the
amount of revenue can be reliably
measured.
Contract modifications
A contract modification, including a
contract claim, exists when the parties
to the contract approve a change that
creates or changes the enforceable
rights and obligations of the parties. A
modification only affects a contract
once it is approved, which can be in
writing, oral, or based on customary
business practices.
A contract modification is treated as a
separate contract only if it results in
the addition of a distinct performance
obligation and the price is reflective of
the stand-alone selling price of that
additional performance obligation.
If the above criteria are not met, the
contract modification is accounted for
as an adjustment to the original
contract, either through a cumulative
catch-up adjustment to revenue or a
prospective adjustment to revenue
when future performance obligations
are satisfied, depending on whether
the remaining performance
obligations are distinct from those in
the original contract.
U.S. GAAP includes detailed revenue
and cost guidance on the accounting
for unpriced change orders (or those
in which the work to be performed is
defined, but the price is not).
There is no detailed guidance on the
accounting for unpriced change
orders.
Impact – both U.S. GAAP and IFRS:
Change orders are a common form of contract modification in the IP industry.
Change orders will be treated as separate contracts under the new standard if
they represent distinct performance obligations and the price reflects their
standalone selling price. A good is distinct if the customer can benefit from it
on its own (or with other readily available resources) and the entity’s promise
to transfer the good is separable from the other promises in the contract.
If the goods or services in the modification are distinct from those transferred
before the modification, but the price of the additional goods or services does
not represent the current selling price of those goods or services, the change is
considered a modification of the initial contract and should be recorded
prospectively. A change order that affects a partially completed performance
obligation will be accounted for through a cumulative catch-up adjustment at
the date of the contract modification.
Changes to only the transaction price
will be treated like any other contract
modification. As it will not result in a
separate contract, the change in price
will be either accounted for
prospectively or on a cumulative
catch-up basis, depending on whether
the remaining performance
obligations are distinct.
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Determining transfer of control and recognizing revenue
Many IP entities have contracts that include long-term manufacturing and may include a service (installation or
customization) along with the sale of products. The products and services may be delivered over a period ranging from
several months to several years.
New model
Current U.S. GAAP
Current IFRS
Revenue is recognized upon the
satisfaction of performance
obligations, which occurs when
control of the good or service transfers
to the customer. Control can transfer
at a point in time or over time.
Service revenue from transactions not
specifically in the scope of contract
accounting is recognized by applying
either the proportional performance
model or the completed contract
model, depending on the specific facts.
Revenue is recognized for transactions
not in the scope of the contract
accounting guidance once the
following conditions are satisfied:
A performance obligation is satisfied
over time if any of the following
criteria is met:
For transactions in the scope of
construction-type and production-type 
contract guidance (ASC 605-35),
revenue is recognized using the
percentage-of-completion method
when reliable estimates are available.
Transfer of control

The customer receives and
consumes the benefits of the
entity’s performance as the entity
performs.

The risk and rewards of ownership
have transferred.
The seller does not retain
managerial involvement to the
degree usually associated with
ownership nor retain effective
control.
When reliable estimates cannot be
made, but there is assurance that no
loss will be incurred on a contract (for
example, when the scope of the
contract is ill-defined, but the
contractor is protected from an overall
 The entity's performance does not loss), the percentage-of-completion
create an asset with alternative use method based on a zero profit margin
to the entity and the entity has an is used until more precise estimates
can be made.
enforceable right to payment for
performance completed to date.
The completed-contract method is
A performance obligation is satisfied
required when reliable estimates
at a point in time if it does not meet
cannot be made.
one of the criteria above.

The amount of revenue can be
reliably measured.

It is probable that the economic
benefit will flow to the entity.

The costs incurred can be
measured reliably.
Determining the point in time when
control transfers will require
judgment. Indicators that should be
considered in determining whether the
customer has obtained control of a
good include:

The entity's performance creates
or enhances an asset that the
customer controls as the asset is
created or enhanced.
Revenue is recognized for transactions
in the scope of contract accounting,
using the percentage-of-completion
method when reliable estimates are
available.

The entity has a right to payment.

The customer has legal title.
When reliable estimates cannot be
made but it is probable that no loss
will be incurred on a contract (for
example, when the scope of the
contract is ill-defined, but the
contractor is protected from an overall
loss), the percentage-of-completion
method based on a zero profit margin
is used until more-precise estimates
can be made.

The customer has physical
possession.
The completed contract method is not
permitted.

The customer has the significant
risks and rewards of ownership.

The customer has accepted the
asset.
Impact – both U.S. GAAP and IFRS:
Management will need to apply judgment to assess the criteria for whether
performance obligations are satisfied over time, especially whether assets have
an alternative use and whether the entity has a right to payment for
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New model
Current U.S. GAAP
Current IFRS
performance completed to date. Depending on facts and circumstances,
entities that are using construction-type accounting under IFRS may have to
recognize revenue at a point in time. This is a change compared to current
IFRS guidance which, unlike U.S. GAAP, does not allow entities to use the
completed contract method.
Manufacturers of large volumes of homogeneous goods produced to a
customer’s specification could meet the criteria for recognition over time when
(1) such goods have no alternative use given they are highly customized or if
they contractually cannot be redirected to another party, and (2) the payment
terms provide that the customer will reimburse costs incurred plus a
reasonable profit margin for both completed units and those in production at
any point of time. This could result in revenue being recognized earlier than
under current guidance.
Measuring progress for
performance obligations
satisfied over time
Methods for recognizing revenue when The use of a proportional performance Service revenue from transactions not
control transfers over time include:
model based upon cost-to-cost
in the scope of contract accounting is
measures is generally not appropriate recognized based on the stage of

input methods that recognize
for transactions outside the scope of
completion if the transaction's
revenue on cost incurred, labor
contract accounting.
outcome can be estimated reliably.
hours expended, time lapsed, or
machine hours used; and
Entities applying contract accounting Entities applying contract accounting
use either an input method (for
can use either an input method (for

output methods that recognize
example, cost-to-cost, labor hours,
example, cost-to-cost, labor hours,
revenue based on units produced
labor cost, machine hours, material
labor cost, machine hours, material
or delivered, contract milestones, quantities), an output method (for
quantities), an output method (for
or surveys of work performed.
example, physical progress, units
example, physical progress, units
produced, units delivered, contract
produced, units delivered, contract
Outputs used to measure progress
milestones), or the passage of time to
milestones), or the passage of time to
may not be directly observable and the measure progress towards completion. measure progress towards completion.
information to apply them may not be
available without undue cost. In such
Once a "percentage complete" is
Once a "percentage complete" is
cases an input method may be
determined (using the appropriate
determined (using the appropriate
necessary.
measure of progress), there are two
measure of progress), IFRS requires
different approaches for determining
the use of the Revenue method to
Output methods such as "units
revenue, costs of revenue, and gross
determine revenue, costs of revenue,
produced" or "units delivered" may
profit: the Revenue method or the
and gross profit. The Gross Profit
not faithfully depict an entity’s
Gross Profit method.
method is not permitted.
performance if at the end of the
reporting period the value of work-in- Impact – both U.S. GAAP and IFRS:
The new standard allows both input and output methods for recognizing
progress or finished goods controlled
revenue for performance obligations that are satisfied over time. Management
by the customer is material or if the
should select the method that best depicts the transfer of control of goods and
contract provides both design and
services to the customer. Input methods should represent the transfer of
production services. In such cases,
control of the asset or service to the customer and should therefore exclude the
each item produced or delivered may
not transfer an equal amount of value costs of any activities that do not depict the transfer of control (for example,
abnormal amounts of wasted labor or materials).
to the customer.
Entities manufacturing large volumes of homogeneous products that meet the
criteria for performance obligations satisfied over time will be required to
recognize revenue as goods are produced rather than when they are delivered
to the customers. This could be the case for certain contract manufacturers
depending on the terms of the arrangements.
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New model
Current U.S. GAAP
Current IFRS
The Gross Profit method of calculating revenue, costs of revenue, and gross
profit based on the “percentage complete” will no longer be acceptable under
the new standard, which is a change from current U.S. GAAP. Methods used
under IFRS are likely to be acceptable under the new standard.
Example #1
Facts: A vendor enters into a contract to produce a significantly customized product for a customer. Management has
determined that the contract is a single performance obligation. The contract has the following characteristics:

The customization is significant and customer's specifications may be changed at the customer's request during the
contract term.

Non-refundable, interim progress payments are required to finance the contract.

The customer can cancel the contract at any time (with a termination penalty) and any work in process has no
alternative use to the vendor.

Physical possession and title do not pass until completion of the contract.
How should the vendor recognize revenue?
Discussion: The terms of the contract, in particular the customer specifications (and ability to change the specifications)
indicate that the work in process has no alternative use to the vendor, and the non-refundable progress payments
suggest that control of the product is being transferred over the contract term. Revenue is therefore recognized over
time as the products are produced. Management will need to select the most appropriate measurement model (either an
input or output method) to measure the revenue arising from the transfer of control of the product over time.
Example #2
Facts: A vendor enters into a contract to construct several products for a customer. Management has determined that
the contract is a single performance obligation. The contract has the following characteristics:

The majority of the payments are due after the products have been installed.

The customer can cancel the contract at any time (with a termination penalty) and any work in process remains the
property of the vendor.

The work in process can be completed and sold to another customer.

Physical possession and title do not pass until completion of the contract.
How should the vendor recognize revenue?
Discussion: The terms of the contract, in particular payment upon completion and the inability of the customer to
retain work in process, suggest that control of the products is transferred at a point in time. The vendor will not
recognize revenue until control of the products has transferred to the customer.
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Example #3
Facts: A vendor enters into a contract to manufacture ten products for a customer. Management has determined that
the contract is a single performance obligation satisfied over time. Each product takes a few weeks to be manufactured
and during production the entity has significant work in process.
How should the vendor recognize revenue?
Discussion: The entity should apply a method that depicts the entity’s performance to date, and that should not exclude
a material amount of goods or services for which control has transferred to the customer. Given that the performance
obligation is satisfied over time, control is transferred to the customer as the products are being manufactured. Since
the work in process is always significant, using a units–of-delivery or a units-of-production method will ignore the work
in process that belongs to the customer. Therefore these methods may not be appropriate. An input method such as
cost-to-cost is likely to better depict the transfer of control.
Variable consideration
The transaction price is the consideration the vendor expects to be entitled to in exchange for satisfying its performance
obligations in an arrangement. Determining the transaction price may require judgment if the consideration contains
an element of variable or contingent consideration. Common considerations in this area include the accounting for
volume discounts, awards/incentive payments, claims, and significant financing components.
Variable consideration is included in the transaction price only to the extent that it is probable [U.S. GAAP] or highly
probable [IFRS] that a significant reversal in the cumulative amount of revenue recognized will not occur in future
periods if the estimates of variable consideration change. However, entities need to consider whether there is some
minimum amount that is not subject to reversal, even if the total amount of variable consideration is not included in the
transaction price.
New model
Current U.S. GAAP
Current IFRS
Volume discounts are recognized as a
reduction to revenue as the customer
earns the rebate. The reduction is
limited to the estimated amounts
potentially due to the customer. If the
discount cannot be reliably estimated,
revenue is reduced by the maximum
potential rebate.
Volume discounts are systematically
accrued based on discounts expected
to be taken. The discount is then
recognized as a reduction of revenue
based on the best estimate of the
amounts potentially due to the
customer. If the discount cannot be
reliably estimated, revenue is reduced
by the maximum potential rebate.
Volume discounts
Volume discounts represent variable
consideration and are recognized as a
reduction to revenue. Both a
qualitative and a quantitative
assessment need to be performed to
determine if revenue is subject to a
significant reversal. Factors that
indicate that including an estimate of
volume discounts in the transaction
price could result in a significant
revenue reversal include, but are not
limited to the following:

The amount of consideration is
highly susceptible to factors
outside the entity’s influence.

The uncertainty about the amount
of consideration is not expected to
be resolved for a long period of
time.
Impact – both U.S. GAAP and IFRS:
Entities will need to consider their experience with a client or with similar
clients and other factors to determine what volume discounts are probable
[U.S. GAAP] or highly probable [IFRS] and what level of rebate should be
deferred.
The accounting for volume discounts may be different than under current U.S.
GAAP. Volume discounts are recognized as they are earned under current U.S.
GAAP. Under the new standard, these types of volume discounts represent an
option that the customer receives, as it provides the customer with a right to a
discounted product in the future. Revenue might have to be recognized later
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New model
Current U.S. GAAP
Current IFRS

The entity’s experience (or other
evidence) with similar types of
contracts is limited.

The entity has a practice of either
offering a broad range of price
concessions or changing the
payment terms and conditions of
similar contracts in similar
circumstances.
than today given that entities will need to defer a portion of revenue from sales
occurring earlier in the arrangement and recognize it in conjunction with
discounted sales in the future. Entities will need to consider the variable
consideration guidance to ensure that revenue recognized for sales occurring
earlier in the arrangement will not be subject to significant reversal in the
future. The accounting under the new standard is similar to existing IFRS
guidance.

The contract has a large number
and broad range of possible
consideration amounts.
Customer options to acquire
additional goods or services for free or
at a discount come in many forms,
including sales incentives, customer
award credits (or points), contract
renewal options or other discounts on
future goods or services.
Awards/Incentive
payments/Claims
Same as for volume rebates above.
Awards/incentive payments are
included in contract revenue (under
the scope of construction-type and
production-type contract accounting)
when the specified performance
standards are probable of being met
and the amount can be reliably
measured.
A claim is recorded for contracts
under the scope of construction-type
and production-type contract
accounting as contract revenue only if
it is probable and can be reliably
estimated, which is determined based
on specific criteria. Claims meeting
these criteria are only recorded to the
extent of contract costs incurred.
Profits on claims are not recorded
until they are realized.
Awards/incentive payments are
included in contract revenue when the
specified performance standards are
probable of being met and the amount
can be reliably measured.
A claim is included in contract revenue
only if negotiations have reached an
advanced stage such that it is probable
the customer will accept the claim and
the amount can be reliably measured.
Impact – both U.S. GAAP and IFRS::
Accounting for awards, incentive payments and claims is likely to be similar
under the new standard compared to today's accounting (U.S. GAAP and
IFRS).
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New model
Current U.S. GAAP
Current IFRS
The discounting of revenues is
required in only limited situations,
including receivables with payment
terms greater than one year.
Discounting of revenues to present
value is required in instances where
the effect of discounting is material.
Significant financing component
An entity will adjust the amount of
promised consideration to reflect the
time value of money if the contract
includes a significant financing
component.
Interest income will need to be
separately presented from the sale of
goods or services.
When discounting is required, the
discount rate should reflect a separate
financing transaction between the
entity and its customer and also factor
in credit risk.
As a practical expedient, an entity is
not required to reflect the effects of a
significant financing component when
the time period between payment and
performance is less than one year.
An imputed interest rate is used in
these instances for determining the
amount of revenue to be recognized,
When discounting is required, the
interest component is computed based as well as the separate interest income
component to be recorded over time.
on the stated rate of interest in the
instrument or a market rate of interest
if the stated rate is considered
unreasonable.
Impact – both U.S. GAAP and IFRS:
The new standard is not significantly different than today's guidance. We do
not expect a significant change to current practice for most IP and
manufacturing entities in connection with the existence of a significant
financing component, because payment terms often do not extend more than
one year from the time of contract performance.
An entity paid in advance for goods or
services need not reflect the effects of
time value of money when:
(a) the transfer of those goods or
services to the customer is at
the discretion of the customer;
(b) if a substantial amount of the
consideration promised by the
customer is variable and the
amount or timing of that
consideration varies on the
basis of the occurrence or
non-occurrence of a future
event not substantially in the
control of the customer or the
entity; or
(c) the difference between the
promised consideration and
the cash selling price of the
good or service arises for
reasons other than the
provision of finance to either
the customer or the entity,
and the difference between the
two is proportional to the
reason for the difference.
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Example #4
Facts: A chemical entity has a one-year contract with a car manufacturer to deliver high performance plastics. The
contract stipulates that the chemical entity will give the car manufacturer a rebate when certain levels of future sales are
reached, according to the following scheme:
Rebate
0%
5%
10%
Sales Volume
0
10,000,000 lbs
10,000,001
30,000,000 lbs
30,000,001 lbs and above
The rebates are calculated based on gross sales in a calendar year and paid at the end of the first quarter of the following
year. Based on past experience and expected car sales for the year, management believes that the most likely rebate that
it will have to pay is 5%. How does the chemical entity recognize revenue?
Discussion: The entity has experience with similar types of contracts with this client. Considering that experience and
its expectation of car sales for the year, management recognizes revenue based on the amount not expected to be subject
to significant reversal. So 95% of the transaction price is recognized as goods are provided to the car manufacturer. This
estimate is monitored and adjusted, as necessary, using a cumulative catch-up approach.
Contract costs
IP entities frequently incur costs prior to finalizing a contract. Costs to obtain or fulfill a contract may include
engineering set-up costs, pre-contract planning and design costs, and sales commissions.
New model
Current U.S. GAAP
Current IFRS
Incremental costs to obtain a contract
should be recognized as an asset if
they are expected to be recovered.
There is detailed guidance on the
accounting for contract costs that are
under the scope of construction-type
and production-type contract
guidance (ASC 605-35).
There is detailed guidance on the
accounting for contract costs in
construction contract accounting (IAS
11).
Incremental costs of obtaining a
contract are costs that the entity would
not have incurred if the contract had
not been obtained (for example, sales
commissions). They can include costs
incurred before the contract is
obtained if those costs relate to an
anticipated contract that the entity can
specifically identify.
An entity is permitted to expense
contract acquisition costs as incurred
as a practical expedient for contracts
with a duration of one year or less.
Direct costs incurred to fulfill a
contract are first assessed to
determine if they are within the scope
of other standards (e.g., inventory,
intangibles, fixed assets), in which
case the entity should account for such
costs in accordance with those
standards (either capitalize or
expense).If they are not in the scope of
other guidance, they should be
Pre-contract costs that are incurred
for a specific anticipated contract may
be deferred only if the costs can be
directly associated with a specific
anticipated contract and if their
recoverability from that contract is
probable.
Outside of contract accounting, there
is limited guidance on the treatment of
costs associated with revenue
transactions. Certain types of costs
incurred prior to revenue recognition
may be capitalized if they meet the
definition of an asset.
Costs that relate directly to a contract
and are incurred in securing that
contract are included as part of
contract costs that can be capitalized if
they can be separately identified,
measured reliably, and it is probable
that the contract will be obtained.
Costs associated with transactions that
are not in the scope of contract
accounting are capitalized if such costs
are within the scope of other asset
standards (for example, inventory,
PP&E or intangible assets) or meet the
definition of an asset in the
Conceptual Framework.
Impact – both U.S. GAAP and IFRS:
Costs likely to be in the scope of this guidance include, among others, sales
commissions, set-up costs for service providers, and costs incurred in the
design phase of construction projects.
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New model
evaluated under the revenue standard.
An entity recognizes an asset only if
the costs relate directly to a contract,
generate or enhance resources that
relate to future performance, and are
expected to be recovered. Costs related
to inefficiencies (for example,
abnormal costs of materials, labor, or
other costs to fulfill) should be
expensed as incurred.
Incremental costs to obtain a contract
as well as fulfillment costs are
amortized in a manner consistent with
the pattern of transfer of the goods or
services to which the asset relates.
Current U.S. GAAP
Current IFRS
Cost to fulfill a contract can also include training costs. Under current IFRS,
training costs typically cannot be capitalized as they do not meet the definition
of an asset. As the trained employees can leave at any time, the manufacturer
does not control the benefit associated with the training. Training costs are not
covered specifically under current U.S. GAAP guidance and there is therefore a
policy choice on expensing versus capitalizing.
The impact on entities will vary depending on the guidance and policies
followed currently. However, policy elections on whether to capitalize or
expense costs will no longer be permitted, except as it relates to the practical
expedient for costs to obtain a contract with a duration of one year or less.
Example #5
Facts: A salesperson earns a 5% commission on a contract that was signed during January 20X1. The products
purchased in the contract will be delivered throughout the next year. How should the entity account for the commission
paid to its employee?
Discussion: The commission payment should be capitalized as it represents a cost of obtaining the contract. However,
in this example, as a practical expedient, the commission can be expensed as incurred since the commission relates to a
contract that extends one year or less.
Example #6
Facts: A manufacturer incurs upfront contract costs at the beginning of a long-term production contract. These upfront
costs include the training of employees, setting up the factory for production, and non-recurring engineering costs
related to the production equipment. How should these costs be accounted for?
Discussion:
Training costs will likely be expensed as incurred under the new standard. Only those costs that generate or enhance
resources used to satisfy performance obligations in the future can be capitalized. Training of employees is unlikely to
generate or enhance resources of the entity, and therefore do not meet the criteria for capitalization. Demonstrating
that training costs relate to future performance obligations might be difficult and may result in some of those costs
being expensed as incurred.
The costs of setting up the factory and engineering should first be assessed to determine if they should be capitalized
under fixed asset guidance. Those costs and any other upfront contract costs incurred which are not covered by existing
fixed asset standards should be assessed to determine if they (a) relate directly and exclusively to this specific contract;
(b) generate or enhance resources of the entity that will be used for the production, and (c) are probable of recovery.
Costs that meet all three criteria are capitalized and then amortized over the contract period as control of the goods
produced is transferred to the customer.
National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com
In depth 11
Collectibility
Collectibility refers to the risk that the customer will not pay the promised consideration. The new model includes a
collectibility threshold for determining whether a transaction is in the scope of the revenue guidance.
New model
Current U.S. GAAP
Current IFRS
To be in the scope of the new
standard, an entity needs to conclude
at the inception of the contract that
collectibility is probable. The term
“probable” has different meanings
under U.S. GAAP and IFRS.
Revenue from an arrangement is
deferred in its entirety if an entity
cannot conclude that collection from
the customer is reasonably assured.
An entity must establish that it is
probable that the economic benefits of
the transaction will flow to the entity
before revenue can be recognized.
Credit risk is reflected as a reduction
of accounts receivable by recording an
increase in the allowance for doubtful
accounts and bad debt expense.
A provision for bad debts (incurred
losses on financial assets including
accounts receivable) is recognized in a
two-step process: (1) objective
evidence of impairment must be
present; then (2) the amount of the
impairment is measured based on the
present value of expected cash flows.
The collectibility assessment is based
on both the customer’s ability and
intent to pay as amounts become due.
The assessment of collectability should
be made after considering any price
concessions that the entity might
provide to the customer.
Impact – both U.S. GAAP and IFRS:
The inclusion of a collectibility threshold is not a significant change to current
guidance. An arrangement that does not meet the collectability threshold does
not meet the criteria to be a contract in the scope of the new revenue standard.
An entity that receives consideration from a customer in an arrangement that
does not meet the collectability threshold will likely not recognize revenue for
that consideration as it is received from the customer, even if it is non(a) the entity has no remaining
refundable. In other words, an arrangement that does not meet the
obligations to transfer goods
collectability threshold does not default to cash basis accounting. Any
or services to the customer
consideration received is recorded as a liability until there are no remaining
and all, or substantially all, of performance obligations and all or most of the consideration has been received
the consideration promised by or the contract is terminated and any consideration that has been received is
the customer has been
nonrefundable. This could result in revenue being recorded later than under
received by the entity and is
current guidance in some situations.
non-refundable; or
When a contract with a customer does
not meet the collectability threshold
and the entity receives consideration
from the customer, the entity shall
recognize the consideration received
as revenue only when either:
(b) the contract has been
terminated and the
consideration received from
the customer is nonrefundable.
An entity shall reassess throughout the
contract period whether (a) an
arrangement that did not meet the
collectability threshold subsequently
meets that threshold and therefore
should be accounted for under the
revenue standard, or (b) there is an
indication of a significant change in
facts and circumstances relating to a
contract that initially met the
collectability threshold.
Initial and subsequent impairment
should be presented prominently as an
expense below gross margin.
National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com
In depth 12
Principal versus agent
IP entities may involve third parties when providing goods and services to their customers. Management needs to assess
whether the entity is acting as the principal or an agent in such arrangements.
New model
Current U.S. GAAP
Current IFRS
An entity recognizes revenue on a
gross basis if it is the principal in the
arrangement, and on a net basis (that
is, equal to the commission received) if
it is acting as an agent.
Specific indicators are provided for
entities to consider when assessing
whether the entity is the principal or
the agent in an arrangement.
Specific indicators are provided for
entities to consider when assessing
whether the entity is the principal or
the agent in an arrangement.
Revenue is recognized net (e.g., based
on the amount of the commission) in
an agency relationship.
Revenue is recognized net (e.g., based
on the amount of the commission) in
an agency relationship.
An entity is the principal in an
arrangement if it obtains control of the
goods or services of another party in
advance of transferring control of
those goods or services to a customer.
The entity is an agent if its
performance obligation is to arrange
for another party to provide the goods
or services.
Indicators that the entity is an agent
include:

The other party has primary
responsibility for fulfillment of the
contract (that is, the other party is
the primary obligor).

The entity does not have inventory
risk.

The entity does not have
discretion in establishing prices.

The entity does not have customer
credit risk.

The entity’s consideration is in the
form of a commission.
Impact – both U.S. GAAP and IFRS:
The indicators of a principal or agent relationship are similar to the current
guidance in U.S. GAAP and IFRS. The guidance does not weigh any of the
indicators more heavily than others, similar to IFRS. Under existing U.S.
GAAP, some indicators carry more weight (e.g., the entity is the primary
obligor, has general inventory risk, and latitude in establishing price).
Regardless, we do not expect a significant change in practice for many
industrial products and manufacturing entities. However, the criteria should be
carefully considered to determine if control of a good or service passes to an
entity before it is transferred to a customer.
National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com
In depth 13
Warranties
Many IP entities provide standard warranties with their products that can be effective for a number of years. A standard
warranty is given to all customers and protects against defects for a specific time period. Many entities also offer
extended warranties or sell warranties separately that provide for coverage beyond the standard warranty period.
New model
Current U.S. GAAP
Current IFRS
An entity will account for a warranty
as a separate performance obligation if
the customer has the option to
purchase the warranty separately.
Entities typically account for standard
warranties protecting against latent
defects in accordance with existing
loss contingency guidance. An entity
recognizes revenue and concurrently
accrues any expected costs for these
warranty repairs.
Entities typically account for standard
warranties protecting against latent
defects in accordance with existing
provisions guidance. An entity
recognizes revenue and concurrently
accrues any expected cost for these
warranty repairs.
Separately priced extended warranties
result in the deferral of revenue based
on the contractual price of the
extended warranty. The value deferred
is amortized to revenue over the
extended warranty period.
Revenue from the sale of extended
warranties is deferred and recognized
over the period covered by the
warranty.
An entity will account for a warranty
as a cost accrual if it is not sold
separately unless the warranty is to
provide the customer with a distinct
service.
If a part of a warranty provides a
customer with a service in addition to
the assurance that the product
complies with agreed-upon
specifications, the entity should
account for that part of the warranty
as a performance obligation. A
warranty that provides both assurance
and services should be accounted for
as a service if the entity is unable to
distinguish the assurance portion from
the service portion.
Impact – both U.S. GAAP and IFRS:
Warranties that are sold separately are separate performance obligations for
which revenue is recognized over the warranty period, similar to the
accounting treatment under existing guidance.
Under U.S. GAAP, the value ascribed to warranties that are separately priced
may be affected as the arrangement consideration will be allocated on a relative
standalone selling price basis rather than at the contractual price under current
guidance. As a result, the amount of revenue deferred for extended warranties
might differ under the new standard compared to current guidance. The new
standard should not change current practice under IFRS.
Example #7
Facts: An entity sells a product which includes a 90-day standard warranty. The entity will replace defective
components of the product under the standard warranty. The warranty does not provide an additional service to the
customer. How does the entity account for such a warranty?
Discussion: The entity should account for the warranty as a cost accrual, similar to today's guidance.
Example #8
Facts: An entity sells a product which includes a 90-day standard warranty. Customers can also purchase a separate
warranty that provides for an additional 18 months of coverage. How does the entity account for such a warranty?
Discussion: The standard warranty is accounted for in the same manner as the standard warranty offered in Example 7
above because it is not sold separately and does not provide an additional service. Similar to current guidance under
both U.S. GAAP and IFRS, the warranty sold separately is accounted for as a separate performance obligation.
Management will allocate the transaction price (that is, contract revenue) to the product and the extended warranty
based on their relative standalone selling prices. Revenue allocated to the extended warranty would be recognized over
the warranty coverage period (starting on day 91 through the following 18 months).
National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com
In depth 14
About PwC’s Industrial Products practice
PwC’s Industrial Products practice provides financial, operational, and strategic services to global organizations across the
Aerospace & Defense, Business Services, Chemicals, Engineering & Construction, Forest, Paper, & Packaging, Industrial
Manufacturing, Metals, and Transportation & Logistics industries.
PwC helps organizations and individuals create the value they’re looking for. We’re a network of firms in 157 countries
with more than 184,000 people who are committed to delivering quality in assurance, tax and advisory services.
For more information, please contact:
Tracey Stover
U.S. Industrial Products Assurance Leader
Phone: 1-720-931-7466
Email: tracey.a.stover@us.pwc.com
Bobby Bono
U.S. Industrial Manufacturing Leader
Phone: 1-704-350-7993
Email: robert.b.bono@us.pwc.com
Max Blocker
U.S. Forest, Paper & Packaging Leader
Phone: 1-678-419-4180
Email: max.blocker@us.pwc.com
Antoine Westerman
Global Chemicals Leader
Phone: +31 (0)88 792 39 46
Email: antoine.westerman@nl.pwc.com
Questions?
Authored by:
PwC clients who have questions about this
In depth should contact their engagement
partner. Engagement teams that have
questions should contact members of the
Revenue team in the National Professional
Services Group (1-973-236-7804 or 1-973236-4377).
Dusty Stallings
Partner
Phone: 1-973-236-4602
Email: dusty.stallings@us.pwc.com
Lisa D Heskett
U.S. Industrial Manufacturing Client
Service Advisor
Phone: 1-678-419-1960
Email: lisa.heskett@us.pwc.com
Amélie Jeudi de Grissac
Senior Manager
Phone: 1-973-236-7441
Email:
amelie.m.jeudi.de.grissac@us.pwc.com
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